We Tracked Every Dollar 235 U.S. Households Spent for a Year, and Found Widespread Financial Vulnerability

Executive Summary

Income inequality in the United States is growing, but the most common economic statistics hide a significant portion of Americans’ financial instability by drawing on annual aggregates of income and spending. Annual numbers can hide fluctuations that determine whether families have trouble paying bills or making important investments at a given moment. The lack of access to stable, predictable cash flows is the hard-to-see source of much of today’s economic insecurity. Researchers analyzed data from the U.S. Financial Diaries (USFD), which collects detailed cash flow data for American households. The major finding was that the households’ incomes were highly unstable – even for those with full-time work. And monthly spending was just as volatile as income. The challenge for a growing number of Americans is that they have insufficient ways to cope with these ups and downs.

Income inequality in the United States is growing, but the most common economic statistics hide a significant portion of Americans’ financial instability by drawing on annual aggregates of income and spending. Annual numbers can hide fluctuations that determine whether families have trouble paying bills or making important investments at a given moment. The lack of access to stable, predictable cash flows is the hard-to-see source of much of today’s economic insecurity.

We came to understand this after analyzing the U.S. Financial Diaries (USFD), an unprecedented study to collect detailed cash flow data for U.S. households. From 2012 to 2014 we set up research sites in 10 communities across the country. The USFD research team engaged 235 households that were willing to let us track their financial lives for a full year. We tried to record every single dollar the households earned, spent, saved, borrowed, and shared with others. We logged all transactions, whether they occurred digitally or in cash, above the table or below, in money or in kind. The households had at least one worker, and none were among the poorest or richest in their communities. Beyond that, the households were diverse: rural, urban, white, black, Hispanic, Asian, recent immigrants, and families that have been in the U.S. for generations.

Our first big finding was that the households’ incomes were highly unstable, even for those with full-time workers. We counted spikes and dips in earning, defined as months in which a household’s income was either 25% more or 25% less than the average. It turned out that households experienced an average of five months per year with either a spike or dip. In other words, incomes were far from average almost half of the time. Income volatility was more extreme for poorer families, but middle class families felt it too.

This income volatility is the result of broad shifts in the labor market. As employment in the service and retail sectors has grown, and dynamic staffing policies have spread, more workers depend on income from commissions, tips, and hourly work with fluctuating schedules. The unemployment rate has been low (under 5% nationally), but that doesn’t necessarily create stable incomes: Half of the volatility we saw was due to variation in the size of paychecks within the same job.

We found that monthly spending was just as volatile as income. On top of regular expenses, emergencies arose frequently: Cars needed repair, roofs needed fixing, tuition bills came due, and people got sick. In addition, the rising relative costs of health care, housing, education, and transportation stretched budgets and cut into the slack available to buffer shocks, especially with the well-documented stagnation of real wages for most workers. In 2015 low- and middle-income families devoted about one-third of their earnings to housing, and they have seen housing prices rise 25%–50% since the mid-1990s. The cost of a bachelor’s degree from a public college has risen by one-third from 2003 to 2014. Even with the Affordable Care Act, health care costs have continued to grow, and low-income families, unable to afford high monthly payments, have relied on plans with high deductibles, leaving them exposed to significant out-of-pocket expenses.

Elaine Sullivan, a participant in the USFD study, illustrates many workers’ experience. Elaine ran a school cafeteria for 15 years, a job that came with benefits and steady pay. After being laid off, it took her a year and a half to find a steady job again. She worked her way up to manage several locations of a quick-serve restaurant. As manager, she has health insurance through her employer, but when she had a health emergency, she nonetheless ended up with $8,000 in medical debt due to deductibles and coverage gaps. She’ll have to negotiate a payment plan with the hospital on her own, and now it’s even more important that she keep her job. She does like the job (even though it pays much less than her former one) but for one aspect: sending staff home when business is slow. She tracks a ratio of sales-to-staff on an hourly basis throughout the day, and if her stores are out of the required range set by national headquarters, she hears about it from “upstairs” within 24 hours, which puts her own income stability at risk.

Fundamentally, the instability of households’ cash flows that we saw arises because families bear far more economic risk than they have in the past. Their jobs deliver less-steady income, even when they are full-time. They have less room between their incomes and their spending needs, and less ability to accumulate reserves. And employers and government do less to buffer individual families from the resulting ups and downs.

It doesn’t have to be that way. Volatile income and spending needs are not problems in themselves. When a business, rather than a household, faces such volatility, it responds by building up working capital. Many people can do the equivalent in household terms: They plan, save, rely on family wealth, and use credit and insurance. But the challenge for a growing number of Americans is that they have insufficient ways to cope with the ups and downs. For households, just as for businesses with shaky cash flows, effective ways to cope with the ups and downs are least available to those who need them the most.

But it doesn’t have to be that way, either.

Our close-up look at the cash flows of working families provides a vital missing piece of the inequality story: Financial instability is growing alongside inequality of income and wealth — and the financial instability constitutes a form of inequality in itself. But this close-up look at cash flows suggests new routes to helping families.

Employers have been part of the problem, as they have pushedmore riskonto workers, and they need to be an important part of the solution. Business practices, such as scheduling policies for hourly workers and benefits programs, need to be reconsidered, with a stronger focus on the resulting financial stability of workers. Employers have the ability to offer emergency savings vehicles, connections to high-quality financial services, and access to financial coaching. Financial services providers have the opportunity to innovate, shifting their product set to better enable households to create stability amid volatility. The problems are too deep to solve with any one step, but there are clear ways to start helping struggling Americans rebuild a sense of control and security.